FINC 3131 CH. 2 HW questions

The accounting statement that measures the revenues, expenses, and net income of a firm over a period of time is called the:

income statement.

The matching principle states that:

the costs of producing an item should be recorded when the sale of that item is recorded as revenue.

Draiman, Inc., has sales of $603,000, costs of $255,000, depreciation expense of $62,000, interest expense of $29,000, and a tax rate of 30 percent. The firm paid out $45,000 in cash dividends. What is addition to retained earnings?

Addition to retained earnings $ 134,900 Sales 603,000 -Costs (255,000) -Depreciation (62,000) =EBIT 286,000 -Interest (29,000) =Taxable Inc. 257,000 Taxes (30%) 77,100 (257,000*30%) =Net Income 179,900 Addition to retained earnings: (179,900-45,000)= 134,900

The Toy Store has beginning retained earnings of $28,975. For the year, the company earned net income of $4,680 and paid dividends of $1,600. The company also issued $3,000 worth of new stock. What is the value of the retained earnings account at the end of the year?

$32,055 Retained earnings = $28,975 + $4,680 - $1,600 = $32,055

Which one of the following will decrease the liquidity level of a firm?

Cash purchase of inventory

The SGS Co. had $212,000 in taxable income. Use the rates from Table 2.3. Required: Calculate the company's income taxes.

Income taxes $ 65,930 correct The first $50,000 of income is taxed at 15 percent, the next $25,000 is taxed at 25 percent, the next $25,000 is taxed at 34 percent, and the next $112,000 is taxed at 39 percent. So, the total taxes for the company will be: Taxes = 0.15($50,000) + 0.25($25,000) + 0.34($25,000) + 0.39($212,000 - 100,000) Taxes = $65,930

Draiman, Inc., has sales of $596,000, costs of $262,000, depreciation expense of $65,500, interest expense of $32,500, and a tax rate of 40 percent. What is the net income?

Net income $ 141,600 Sales 596,000 -Costs (262,000) -Depreciation (65,500) =EBIT 268,500 -Interest (32,500) =Taxable Inc. 236,000 Taxes (40%) 94,400 (236,000*40%) =Net Income 141,600

The SGS Co. had $131,000 in taxable income. Use the rates from Table 2.3.

Requirement 1: What is the average tax rate? Average tax rate: 26.21% Taxes = .15($50,000) + .25($25,000) + .34($25,000) + .39($131,000 - 100,000) Taxes = $34,340 The average tax rate is the total taxes paid divided by taxable income, so: Average tax rate = Total tax / Taxable income Average tax rate = $34,340 / $131,000 Average tax rate = .2621 or 26.21% Requirement 2: What is the marginal tax rate? Marginal tax rate: 39% The marginal tax rate is the tax rate on the next dollar of income. The company has net income of $131,000 and the 39 percent tax bracket is applicable to a net income up to $335,000, so the marginal tax rate is 39 percent.

The financial statement that summarizes a firm's accounting value as of a particular date is called the:

balance sheet.

You are given the following information for Sookie's Cookies Co.: sales = $52,200; costs = $38,600; addition to retained earnings = $2,420; dividends paid = $985; interest expense = $1,460; tax rate = 40 percent. What is the depreciation expense?

*Depreciation expense $ 6,465 correct* Net income = Dividends + Addition to retained earnings NI = $985 + 2,420 NI = $3,405 Net income = Taxable income - (Taxable income)(Tax rate) Net income = Taxable income(1 - Tax rate) We can rearrange this equation and solve for the taxable income as: Taxable income = Net income / (1 - Tax rate) Taxable income = $3,405 / (1 - .40) Taxable income = $5,675 EBIT minus interest equals taxable income, so rearranging this relationship, we find: EBIT = Taxable income + Interest EBIT = $5,675 + 1,460 EBIT = $7,135 Now that we have the EBIT, we know that sales minus costs minus depreciation equals EBIT. Solving this equation for EBIT, we find: EBIT = Sales - Costs - Depreciation $7,135 = $52,200 - 38,600 - Depreciation *Depreciation = $6,465*

Klingon Widgets, Inc., purchased new cloaking machinery three years ago for $5.7 million. The machinery can be sold to the Romulans today for $7.9 million. Klingon's current balance sheet shows net fixed assets of $4.5 million, current liabilities of $880,000, and net working capital of $147,000. If all the current assets were liquidated today, the company would receive $995,000 cash.

Requirement 1: What is the book value of Klingon's total assets today? *Total asset book value $ 5,527,000 correct* NWC= CA-CL CA= NWC + CL 1,027,000= 147,000+880,000 *Book value of assets* Current assets 1,027,000 Fixed assets 4,500,000 *Total assets $5,527,000* Requirement 2: What is the market value of Klingon's total assets? *Total asset market value* *$8,895,000* *correct* *Market value of assets* Current assets 995,000 Fixed assets 7,900,000 *Total assets* *8,895,000*

Draiman, Inc., has sales of $600,000, costs of $258,000, depreciation expense of $63,500, interest expense of $30,500, and a tax rate of 40 percent. The firm paid out $43,500 in cash dividends and has 55,000 shares of common stock outstanding.

Requirement 1: What is the earnings per share figure? Earnings per share $ 2.71 correct Income statement Sales $ 600,000 Costs (258,000) Depreciation (63,500) EBIT $ 278,500 Interest (30,500) Taxable inc $ 248,000 Taxes (40%) 99,200 (248,00*40%) Net income $ 148,800 EPS = Net income / Shares outstanding EPS = $148,800 / 55,000 EPS = $2.71 per share Requirement 2: What is the dividends per share figure? Dividends per share $ .79 correct DPS = Dividends / Shares outstanding DPS = $43,500 / 55,000 DPS = $0.79 per share

Over the past year, a firm decreased its current assets and increased its current liabilities. As a result, the firm's net working capital:

had to decrease.